An
annual report of Crawford Industries states: "The Company and its
subsidiaries have long-term leases expiring on various dates after December 31,
2011. Amounts payable under such commitments, without reduction for related
rental income are expected to average approximately $5,711,000 annually for the
next three years. Related rental income from certain subleases to others is
estimated to average $3,094,000 annually for the next three years." What
information is provided by this note?
The reader should recognize that the firm has an obligation
for lease payments of approximately $5,711,000 for each of the next three
years. In certain situations, this information is very important in
determining: (1) the ability of the firm to use additional lease financing, and
(2) the nature of maturing commitments and the amount of cash expenditure
involved. Off-balance-sheet financing is common and the investor should be
cognizant that the company has a commitment even though it is not reflected in
the liability section of the balance sheet. The rental income from the subleases
also provides useful information concerning the company’s ability to generate
revenues and to cover, in part, the cash flow commitment, in the near-term
future.
